A few decades ago, retirement planning was entirely about the employer. Defined benefits and pension plans were the norm, and most workers could expect to live well — or, at the very least, adequately — in retirement.

But more recently, the tide has changed. Much more emphasis has been placed on the employee’s role in their retirement plan. These days, employees are contributing to their plan, adjusting their savings amounts, and even choosing which funds to invest in. As employees take charge of their own retirements and younger generations learn from the mistakes of baby boomers, the industry has no choice but to adapt to the next generation of retirement plans.

Where we stand

Elaine Sarsynski, executive vice president of MassMutual's Retirement Services Division and chairman and CEO, MassMutual International, said the retirement industry is more important now than it ever has been.

“Because of the stress on Social Security, we know that over time Social Security may not be funded appropriately for Gen X, Gen Y, and even baby boomers on the tail end,” she said. “Americans more than ever need the industry because advice and education is paramount right now for our participants.”

“The industry is still very robust,” said Skip Schweiss, president of TD Ameritrade Trust company. “I think there was a little bit of panic that set in about the retirement industry because when the market crashed, people’s 401(k)’s crashed. But a lot of that has kind of faded.”

Now that the panic has subsided, Schweiss added, participants still see 401(k)s as their primary retirement savings vehicles.

But the plans have changed over the years. One of the biggest changes to 401(k)s recently is the addition of auto-features — auto enrollment and auto escalation.

“These features were put in place in response to the lower participation rates we’ve had in the past several years,” said Jennifer Kiesewetter, an employee benefits attorney at the Kiesewetter Law Firm in Memphis, Tenn. “Also, it helps our younger workforce start thinking about retirement earlier.”

Kiesewetter, who also teaches employee benefits at the University of Memphis School of Law, added that, without auto-enrollment features, many younger employees would put off contributing to their retirement plans until they were in their late 30s, this has a detrimental effect on their ability to retire successfully.

“A lot of employers don’t take advantage of auto features because of the costs involved,” said Beth McHugh, vice president of market insight and a 401(k) executive at Fidelity. “But we try to talk to plan sponsors and encourage them to take the long view.”

McHugh said that employers who use auto-enrollment have very few employees opt-out of the plan.

Investment strategies and 401(k) trends

One of the biggest changes for 401(k)s recently is the new investment options, which allow employees to take a more active role in their retirement.

“We’ve seen a shift over the years from really just a focus on mutual funds to more focus on things like collective funds, which traditionally have only been accessible by the large plans,” Schweiss said. “Those have come down market to the smaller plans.”

McHugh said that many plan sponsors are taking a more tiered approach to investments, where a different set of investments might be offered for more sophisticated investors. However, there isn’t very high utilization of those options.

Another seemingly hot product that hasn’t received a very high response, according to McHugh, is the annuitization of 401(k)s.

“Annuities aren’t for everyone,” she said. “It’s really based on the individual’s situation, and there are opportunities for people to purchase them outside of their employer’s plan.”

Some companies, like Ameritrade, are now offering ETFs in their 401(k) plans, and Schweiss said there has been a lot of demand for the product. Some ETFs can even be accessed free of transaction charges.

Schweiss said the interest is probably due to a number of factors; low expenses, the ability to create a custom plan, etc. But the biggest draw, he thinks, is the ability for employees to have more control.

“It’s a double-edged sword,” he said. “I think it’s a great thing that employees can take control over their investments and their retirement destiny, but it does come with a need for greater education.”

The importance of education

For Dave Pitts, manager in the Actuarial and Benefits Consulting Practice at Lurie Besikof Lapidus & Co., education is key to making the new model of retirement savings work.

“We’ve shifted over the last 50 yeas from primarily employer-provided retirement to primarily employee-provided retirement,” he said. “Employees are not going to be as sophisticated as a CEO in how to make smart investment allocations, so there needs to be expanded education in how to make smart investment in your 401k, how to really be your own fiduciary. That’s a lot to ask of the average participant, but that’s where we’re going with the american retirement system.”

Sarsynski agreed; she said the No. 1 focus in the next few years shouldn’t be on new products or investment strategies, but on discovering new, better ways to educate participants.

“The most important thing today in our industry today is switching the conversation to one of plan health and how we can ensure that participants have sufficient income in retirement,” she said.

Regulatory changes ahead

With all the new investment strategies and shifting focus to employee-driven retirement, several new regulations are in the works to help ensure that participants and their investments are protected.

The first two center around providing more disclosure, both of plan-related information and of investment-related information. The regulations go into effect in early 2012. Schweiss said the regulations were very detailed and not particularly controversial.

“I think this is a great leap forward so that plan participants will have a better idea of what they’re getting in they’re plan and what they’re paying for,” he said. “Because there are some plan sponsors that do a great job of hiding those fees or making them invisible.”

The other two regulations, however, are not so easily accepted. The first, which would expand the definition of fiduciary, would have a substantial impact on the industry. Another, the retirement plan advice rule, would change how advisors are able to give advice to plan sponsors. The final rulings haven’t been made yet, but both would have major impacts on the retirement industry, IRAs, and 401(k)s.

There are also some new product regulations that have been discussed, Kiesewetter said. One allows a kind of hybrid plan, which provides both 401(k) benefits and defined benefit plan benefits, to exist. The IRS recently released guidance on this plan, Kiesewetter said, so sample plan documents are just starting to emerge.

There’s also the automatic IRA bill, which allows employees who don’t have access to any type of 401(k) to enroll into an IRA; the employer will auto-hold a portion of the employee’s paycheck and contribute to an IRA on their behalf.

“They’re hoping it will fill the gap for small employers who can’t afford the 401(k) plans for an administrative standpoint, and still allow their employees to save for retirement,” Kiesewetter said.

As employees take control of their retirement, investments become more employee-friendly, and regulatory changes provide more transparency and perhaps drive costs down, there is no doubt that the retirement industry is constantly evolving. The question is, are you evolving with it?

Instant Insights /

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